The bigger a growth company becomes, the harder it is to keep growing at the same pace. Its elemental mathematics: It takes a bigger boost in revenue compared with the year-ago quarter to sustain a 20% growth rate as the revenue base grows larger.
Community Health Systems, Franklin, Tenn., may be the latest example of that. When the company announced its $6.8 billion acquisition of Triad Hospitals, Plano, Texas, in March, some healthcare stock analysts wondered if the dealan uncharacteristically bold and risky move by the steady Community Healthwas a sign that Communitys financial results were slowing down. Sheryl Skolnick, a senior vice president with CRT Capital Holdings, Stamford, Conn., said the first-quarter results released last week fit the hypothesis.
As you looked at the metrics in this quarter, you saw a company that produced acceptable, reasonable, even good results, but is experiencing a slowdown from the kind of results that weve come to expect. The growth is there, but not as quick as it has been, Skolnick said, adding, Its a company that looks like its beginning to hit a wall.
Communitys stated rationale for making its offer on Triad was that Triad has great hospitals in great markets, but lacked the fiscal discipline that Community excels at. Community expects that combination of skills and opportunity to produce better margins than Triad produced in eight years as a stand-alone company after its spinoff from HCA in May 1999.
Skolnick is skeptical. I dont think they understand how different the Triad facilities are from Communitys hospitals, Skolnick said. Triads facilities face much more competition from other hospitals, she said. Physicians in Triads markets, therefore, have more options than in markets where a Community hospital is the sole provider, she said.
If you go in there and you slash and burn at a Triad facility that has been handled with kid gloves and has not been slashed and burned by its former parent, Skolnick said, the doctors can just pick up stakes and go across town and take their patients with them.
Community said it earned $54.3 million in the first quarter, just about a 0.5% increase compared with profits of $54 million in the first quarter of 2006. The flat profits came despite a 17.3% increase in revenue, to $1.2 billion. Labor costs and bad-debt expense both increased as a percentage of revenue, squeezing operating margins from 11.2% in the first quarter of 2006 to 9.9% in the most recent quarter.
Because of the pending acquisition of Triad, Community did not conduct a question-and-answer session via teleconference with analysts. In a brief pre-recorded discussion, Wayne Smith, president, chairman and chief executive officer of Community, said he was very pleased with the companys solid financial results for the quarter.
Smith also noted the progress Community and Triad have made toward completing their deal. The companies expect the deal to close shortly after July 1, the start of the third quarter. Triad announced last week that the 30-day waiting period under the Hart-Scott-Rodino act passed without the Federal Trade Commission challenging the deal on antitrust grounds. Also, the Securities and Exchange Commission advised Triad that it will not comment on the proxy filing detailing the deal that Triad issued on March 30.
Triad also said that it has scheduled a special shareholders meeting on June 12 to seek shareholder approval for the deal. Triad shareholders as of May 3 will be eligible to vote by proxy or in person during the meeting. Community doesnt need approval from its shareholders.
Triad said it will not issue a first-quarter earnings release, but will provide its financial statements in its 10-Q filing with the SEC no later than May 10.